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Housing Markets Are Stable ... Until They're Not

? Apartments converting to condos/co-ops |


| Goldman Sachs Economist on the Bubble ?

September 22, 2005

Housing Markets Are Stable ... Until They're Not

Peter Coy

Three top economists made a splash on the Wall Street Journal's editorial page this past Monday with a piece headlined "Bubble Trouble? Not Likely."

But the way I read the research underlying the Journal piece, a better title would have been "Housing Markets Are Stable ... Until They're Not."

To show that there are no regional housing bubbles--and thus no reason for prices to fall--the economists in effect assume their own conclusion. They assume, without strong evidence, that buyers in each market will continue to expect the same kind of price gains that they've averaged over the past 60 years. If you expect prices to keep rising rapidly, you'll be willing to pay a whole lot today. The market will be stable.

But what if buyers in, say, San Francisco suddenly turn pessimistic about the rate of future price increases? That certainly isn't out of the question given how high prices are relative to rents, or incomes, or to prices elsewhere in the country. If they lose faith that the market will climb steeply ad infinitum, then their willingness to pay a huge sum of money now will plummet. And the market will tank.

That's practically the definition of a popping bubble. By assuming from the start that such a thing won't happen, the authors are assuming their conclusion.

A couple of Journal readers made something like this point in letters to the editor published today. So I called one of the authors to get his side of the story.

I spoke with Todd Sinai of the University of Pennsylvania's Wharton School. He was co-author on the paper with Charles Himmelberg, a research economist at the Federal Reserve Bank of New York, and Christopher Mayer of the Columbia Business School.

Sinai defended the paper. He said it's reasonable to assume that if house prices in, say, San Francisco have risen at an after-inflation clip of better than 3% a year for the past 60 years, that people will continue to expect them to keep going up at that rate for the foreseeable future. Why? Because, he says, hot cities like San Francisco are pretty much built-up, so people are competing to live there by outbidding each other for housing. That, says Sinai, can continue as long as there are rich people in other parts of the country who would really rather live in San Francisco.

I'm not so sure. It feels to me like San Francisco, San Diego, Los Angeles, New York, Miami, Boston, and other costly markets are pricing themselves out of reach. It seems at least possible to me that other people will start to reach that conclusion. If they stop expecting rapid house appreciation, their willingness to pay will fall. And the market could drop rather suddenly.

The authors certainly didn't persuade me that there's no bubble.

11:14 AM


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Tracked on September 23, 2005 09:11 AM

To Rent [rent low enough to be covered by unemployment checks]


[Insurance + Maintenance + Taxes + Interest + Principle Payments MINUS a small deduction that only works when you have a job].

I see people paying in taxes on their "investment" a number that is HALF my rent!

A message to all potential / first time buyers. If we ignore these infeasible prices as a group they will go away. We will be ignoring them shortly after they eat all of your disposable income. Want to send JR to a private school? If you own a house, you can't afford it. A nice dinner at Gary Danko's? Nope. You cant afford it - you are House Poor.

All you people want to do is "leverage" your equity, you never want to pay the darn thing off. PSST - Let me tell you all a little secret, all the rich guys I know own their house flat out - particularly the ones that aren't dotcom rich / nouveaux riche.

Posted by: Mary Starns at September 23, 2005 03:22 AM

Who are they fooling? The very ignorant who are going to eat this mess. This was an excellent piece, finally someone who sees the reality of this overhypered, sucker baited, real estate market and lending atmosphere. No one should overlook that history repeats itself. No one should be so stupid to pay 500K for a house that was less than half that not three years earlier. They obviously forgot the crash. Well I suggest anyone simple go online and research the "The Biggest Market Crash in History the Florida Real Estate Crash" and be forewarned.

Posted by: Truth at September 23, 2005 12:09 PM

Sounds just like Sydney two years ago to me - after all wouldn't everyone want to live in Sydney? 30% falls later and the Central Bank telling everyone that the cost of living in Sydney is too dear - it has all changed.

Posted by: Mike Small at September 23, 2005 02:56 PM

Peter - point well made. What drove markets like NYC and SF is the expectation that prices would continue to escalate. People do not buy housing in markets they think will just stay flat. They really want to believe they are buying below the peak. But now they are starting to believe we've reached the peak...and we are sliding down the other side of that peak...HOLD ON!

Posted by: G at September 24, 2005 01:51 AM

From a technical perspective, this 30+ year housing cycle is over: prices peaked this summer. From a fundamental perspective, consider this from from David Rosenburg at Merrill Lynch: "Prices in the hot U.S. housing market are poised to decline as demand dries up due to the inability of first-time buyers to afford a home." Game Over.

Posted by: cleerview at September 26, 2005 01:56 PM

hi there peter

ive been surfing the net in regards to property and the way things

are going for the last year or so and i hope that what you say is right

as to many people have made to much money out of all this, and at the

moment it appears that it has all come to a stand still, for estate agents

and mortgage lenders, estate agents closing down in certain areas, these

are the people who have upped the house prices over the years anyway

so i dont have any sympathy for them what so ever, but i do for the buyers

who have stretched there finances to buy a property in the first place, the banks

and building soc are not your friends they are in it for the money and that is it, and

they allso know that property is going to come down , it is inevertible that this will

happen and no one can stop it happening, even the banks and building soc i noticed

have inforced a policy that if a first time buyer wants a mortgage of more than 90% they

will have to take a policy out that protects the lender if they have to reprocess the property

and loose money after selling the property, that basically ses it all really does nt it, they

wouldnt advise you in not buying at the moment would they course they wouldnt ,they just want

your money,

in my opinion what started this in the first place is the interest rate, slowly going down to help

people with mortgages in the first place to boost the economy which it did, then some bright spark

used this as a way of upping prices on property re estate agents , i mean you can borrow more money

now and it cost you less, than it did 7years ago, they have allready said that the average house price is

the eqiv to 7times your annual income, well it used to be 3times that, so you would have to be earning

about ?1000 per week right now, and if you now any jobs that pay that type of wage let me now as long

as it has nothing to do with estate agents or mortgage lenders, there time is over, about time to,

best regards kevin

in the UK

Posted by: kevin at October 3, 2005 10:08 AM

How can prices for real estate(single family homes/condos, all other real estate, commercial etc. is by definition speculative), simultaneously increase all over the country, in defience of the fundementals, (Median income, rents, interest rates, median home prices) and there not be a bubble?

RESIDENTIAL real estate (condos and single family houses) has become highly speculative, making that market segment UNSTABLE! If the house next door to you is owned by an "investor" who is banking on a 10% or 20% increase in value before he/she flips it in 6 to 12 months, the market is unstable. If prices decline or stagnate, the speculator is much more likely to walk than an actual resident/owner. If he walks and his house is forclosed, what does that do to comps? Comps are the value that your house is based on when you go to sell.

Nationwide, over 30% of single family homes/condos were purchased by spec buyer since Jan, 2005.

Be afraid, be very afraid.

Posted by: Mike M at October 9, 2005 03:21 PM

You're always at risk of regional fluctuations. Military base closings, industry paradigm shifts obviating certain types of workers. These are very real phenomenon. Also keep in mind the effects of overpriced markets forcing people to cash in and move somewhere cheaper (I did).

I'm about to make a real estate investment, but I'm very aware of these issues. I'm looking at the most solid of solid markets: oceanfront, lakefront, and emerging growth areas.

But always be prepared to ride out a bubble.

Posted by: Mike G at June 27, 2006 02:38 PM

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